Euro Plunges as Bundesbank Predicts German Economic Growth to Miss Prior Outlook

October 25, 2021
Euro Plunges as Bundesbank Predicts German Economic Growth to Miss Prior Outlook October 25, 2021 Lennox Hamilton

The Eurodollar plunged against the greenback today following the release of poor German Ifo business climate index data. The Eurodollar sell-off also intensified with the release of the Bundesbank report stating that the earlier economic growth outlook issued in June will not be met. The Eurodollar slipped 70pips to trade at 1.1590.

The Bundesbank stated in a normal monthly report on Monday that German economic growth is expected to decline considerably in the fourth quarter as industry continues to suffer from supply constraints and demand for services falls.

Europe’s largest economy grew throughout the summer, but unanticipated supply-chain bottlenecks are now stifling its enormous auto manufacturing industry, while increasing energy prices and ongoing fears about the coronavirus outbreak might harm consumer confidence, experts say.

“Growth is anticipated to decelerate substantially in the current quarter,” the Bundesbank said, adding that full-year growth is now expected to be “much” lower than the 3.7 percent predicted in June.

“The robust impetus in the service sector is expected to fade significantly,” the bank said. “Delivery issues are anticipated to persist in the industrial industry.”

The Ifo institute earlier on Monday reported that company confidence dipped for the fourth consecutive month in October, highlighting the central bank’s worries, as supply constraints continued to stymie industry production. The auto industry has been particularly severely impacted by the semiconductor shortfall, which experts predict will extend far into next year, weighing on GDP for months to come.

However, the problems were mainly supply-driven, since industrial orders remained solid, resulting in a “very significant” disparity between demand and output, according to the Bundesbank. Services are also expected to suffer while certain pandemic-related measures remain in place, particularly if coronavirus infection rates continue to rise beyond levels that previously triggered limits.

The Bundesbank warned that these supply concerns, together with increasing energy costs and the reversal of a VAT decrease, would continue to drive up consumer prices, echoing past warnings. “Overall, the rate of inflation is projected to climb for the time being before progressively dropping in the following year,” the report added.

German business confidence fell for the fourth month in a row in October, as manufacturing supply constraints, an increase in energy costs, and increased COVID-19 infections slowed Europe’s biggest economy’s recovery from the epidemic. According to the Ifo Institute, the business environment index slipped to 97.7 in October from an upwardly revised 98.9 in September.

This was the lowest result since April and fell short of the 97.9 predicted in a Reuters survey. The lower-than-expected business confidence poll was followed by a bleak prediction from Germany’s central bank, which said in its monthly report that economic growth would likely fall considerably in the fourth quarter.

The Bundesbank went on to say that full-year growth was now likely to be “substantially” lower than the 3.7 percent it predicted in June. “Supply issues are causing troubles for enterprises,” Ifo President Clemens Fuest said, adding that capacity utilization in manufacturing was declining.

“Sand in the German economy’s wheels is impeding recovery.” According to Ifo economist Klaus Wohlrabe, half of all industrial enterprises expect to raise prices owing to ongoing supply shortages, a record high in the study.

The bottlenecks for intermediate products and raw materials are spreading from manufacturing to other sectors of the economy, such as retailing, which means that not every Christmas gift will be ready for delivery on time, according to Wohlrabe. According to Wohlrabe, supply issues would limit growth to about 0.5 percent in the fourth quarter. In the three months from April to June, the German economy grew by 1.6 percent quarter on quarter.

On Friday, the Federal Statistics Office will provide a preliminary estimate of GDP growth in the third quarter. Analysts estimate a 2.2 percent quarterly increase from July to September. The government is expected to lower its projection for economic growth this year on Wednesday, after major institutions reduced their combined forecast to 2.4 percent from 3.7 percent last week. The institutions forecast 4.8 percent growth in 2022.

“The coronavirus problem has morphed into a shortage issue,” stated Thomas Gitzel, VP Bank economist. Gitzel noted that, in addition to supply issues, the recent increase in gas and energy costs is hindering the recovery.

Other experts saw an increase in COVID-19 infections in Germany, which might result in additional limitations for stores, pubs, and restaurants over the winter months.

According to Commerzbank economist Joerg Kraemer, corporations are expecting lawmakers to impose additional restrictions in response to the recent spike in coronavirus cases. Furthermore, the current coronavirus outbreak is causing manufacturing closures, particularly in Asia, which may worsen material shortages in Germany, according to Kraemer.

“The German economy is unlikely to expand much in the fourth quarter. For at least this quarter, stagflation is on the horizon” he said.

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